"Independent" research may not always be what you think it is.
Because of staffing cuts and tough economic times for Wall Street brokerages, many have had to cut back on the number of stocks they cover, spurring the growth of a new industry.
Listed companies that are not covered by analysts now have an option: Buying research. For anywhere from $1,200 to $25,000, they can secure a stock rating and earnings estimates. And that gains them listings on investor sites like Yahoo Finance! and Thomson Financial.
Even critics say so-called "research for hire" can serve companies and investors who can no longer turn to the brokerages for research. But industry watchers say current regulations are not strong enough to protect the individual investor.
Take the case of Interparfums, whose a market capitalization is now about $500 million. The company makes some of best known fragrances in the world. But it was an unknown commodity on Wall Street.
“We were below the radar for almost every potential analyst and even for many institutional shareholders,” said Russ Greenberg, Interparfums Chief Financial Officer.
So, to get the word out on its stock, Interparfums hired a research firm. For $1,250 a month, Interparfums got a stock rating -- in this case, a “speculative buy” -- as well as earnings forecasts that are included in "consensus" estimates and put on investor data sites like Thomson Financial, Reuters and Yahoo Finance!.
“It's automatic credibility,” said Greenberg. “And I think if you didn't appear there, and there were no estimates and no analyst coverage whatsoever, it'd be a detriment.”
That need is fueling the growth of a new — and largely unregulated — industry: Research for hire.
“There's just not enough information in front of investors for them to evaluate whether it's a responsible securities analyst or a fly-by-night guy who's just in it for a quick buck,” said John Coffee, a securities law professor at Columbia University.
Registered broker/dealer firms are regulated by the National Association of Securities Dealers. But many paid research firms are not broker-dealers.
For these, unregistered firms, SEC rule 10b-5 applies. That rule which requires firms to disclose "material facts" -- in this case, that they are paid by the company they cover. But the rule doesn't outline exactly what else a company must disclose.
“We should make very clear to the investor that an analyst that is not associated with a broker-dealer firm is really an analyst who is really a freelancer,” said Coffee. “And may be it’s a world where the idea of caveat emptor has to apply.”
The Securities and Exchange Commission says current rules are sufficient.
Meantime, critics say investors are at another disadvantage. Chuck Hill headed research at Thomson Financial for 11 years. He says the firm resisted separating out data from research-for-hire firms.
“There's no requirement that they do it,” he said. “But certainly good practice would say that you should be identifying what sort of provider this is.
Thomson Financial would not comment on this issue. Reuters declined to comment as well.
But many research-for-hire firms say additional rules aren't necessary. Michael Taglich is the CEO of Taglich Brothers, an issuer of paid research firm that is registered with the NASD.
“At the end of the day,” said Taglich, “it's judged on whether it's right or not. Or whether it's right more often than it's wrong. And that ultimately is what the marketplace hangs its hat on.”
Still, many say that without tighter rules, research-for-hire will continue to be the Wild West of Wall Street.
“For many small-cap companies, they are not going to get covered by Merrill or Bear Stearns or Smith Barney,” said Greenberg. “And why should they be overlooked?”
The National Investors Relations Institute and the Association for Investment Management and Research have proposed guidelines that would tighten disclosure requirements for research-for-hire firms. But these two trade groups have no enforcement powers.